Educational Articles

From the Survey: Insituform

Brandon B. Cheatham
| November 18, 2010

America is facing yet another crisis, but this one is less apparent to the everyday tax payer. All over the United States, simple infrastructure that we take for granted is literally crumbling beneath our feet. Our sewage and water systems are on the brink of failure and it has gotten to the point where municipalities may finally have to act instead of sweeping the problem under the rug. Years of neglect have led to this situation in which many cities and states will have to spend millions of dollars in order to repair their water and sewage lines. Experts have estimated that the cost to repair the U.S. system will range from $660 billion to $1.1 trillion over the next couple decades. This is a tremendous cost for municipalities facing already strained federal and state budgets, but is something that will have to be addressed because the situation has become so dire.

Insituform (INSU) is a company that’s main business segments focuses on rehabbing sewer systems and repairing pipelines. Forty years ago, the company created a method that could repair sewage systems without digging, which is a major advantage to municipalities that need to repair their ailing water systems without causing major disruptions. As of now, the backlog for Insituforms’ sewer and rehabilitation segment stands at around $200 million, a drop in the bucket compared with the amount of work needed to eventually be done. According to the EPA, these old sewage systems send 860 million gallons of untreated or partially treated sewage into America’s waterways every year, and The American Society of Civil Engineers gave waste treatment plants a grade of D- in the last report card in 2005; demonstrating how ominous the situation truly is.

The company also operates two subsidiaries – Bayou and Corrpro – that focus on energy pipelines. The U.S. currently has 2.5 million miles of fuel pipelines, many of which are aging, causing further infrastructure problems. It is not uncommon for these pipelines to leak or in extreme scenarios, explode, often times taking human lives. According to the Pipeline and Hazardous Material Safety Administration, 16 people died in gas pipeline explosions in 2008 and 2009. Here too, Insituform stands to benefit from an increased investment in much needed maintenance. The company owns several patents on pipeline lining that allow it to repair corroded pipelines giving it a material competitive advantage. Management has been adding crews in order to monetize its backlog. Despite working through the backlog more quickly, management anticipates that it will be able to increase this backlog based on the amount of maintenance that is needed in the U.S’s pipeline infrastructure.

We believe that there may be potential for the company to exceed expectations over the 3- to 5-year period, and will likely deliver record earnings over the next couple of years. Indeed, Insituform operates in a growing segment and has operations throughout the world; The Asia Sewer rehabilitation segment has demonstrated strong growth, with good potential. Therefore, investors may want to consider this company to take advantage of this growing segment over the long term, but are warned to remain cautious based on the potential for future budget cuts that may affect the company’s earnings over the near term.

At time of this article’s writing, the author did not have positions in any of the companies mentioned.